Withdrawing Money From a Roth IRA: How Does It Work and When Can I Do It?

Withdrawing money from your retirement account is something you only really want to do in retirement.

That’s obvious.

What is also obvious is there are definitely times in life when you find yourself with a significant cash crunch and that nest egg looks ripe for the harvest.

Unfortunately for a majority of your retirement account options any early withdrawals are disastrous.

You get hit with fees and taxes; your overall withdrawal can easily be reduced by 25-40%… which means you just have to withdraw even more money to get to the amount that you actually need to use.

It’s a lose-lose situation: you’re paying a lot in fees and taxes while also losing out on potential growth of the account in the future.

…unless you’re using a Roth IRA.

Withdrawing Money from a Roth IRA

Your Roth IRA is one of your only options for withdrawing retirement cash early without needing to pay painful penalties and taxes.

There are some specifics that you need to know to avoid penalties:

Withdrawing Contributions

Individuals are allowed to contribute $5,000 per year (or $6,000 if you are over the age of 50) into a Roth IRA.

Married couples can each have a Roth IRA, providing the opportunity to set aside $10,000 total per year. If you have been contributing to a Roth IRA for 20 or 30 years you are looking at total contributions of $100,000 to $300,000.

With a Roth IRA you can withdraw those contributions at any time without paying any early withdrawal penalties or income taxes to the government.

The Internal Revenue Service (and IRA legislation) allows this because you have already paid taxes on the money you originally contributed into the Roth IRA. This is regardless of your age; you can be age 25, 55, or 75 and still withdraw your contributions without any extra fees.

This makes a Roth IRA a very unique investment vehicle.

You can stretch your finances a bit further by going ahead with a full contribution into the Roth IRA this year. If you run into financial problems and need to pull some money back out next year, you can, without losing money to fees.

You can’t do this with your 401k from your employer or with a Traditional IRA; these popular retirement accounts ding you for taxes and fees on early withdrawals.

How to Avoid Roth IRA Early Withdrawal Penalties and Taxes

Withdrawing from a Roth IRA isn’t that complicated once you understand the rules.

But what if you need to withdraw more than just your contributions?

You can still withdraw without taxes or fees as long as you meet the following criteria:

You are at least age 59 and 1/2.

The Roth IRA has been open for at least 5 years.

If you don’t meet both of these criteria you are likely to be hit with fees for the withdrawal. However, you may be able to still escape if you meet certain exceptions.

Withdrawing Earnings

If you contributed $50,000 over the last 10 years into a Roth IRA and the account value is now $86,000, congratulations are in order because your investments have grown. You have total contributions of $50,000 and investment earnings of $36,000. If you needed access to cash you could withdraw the $50,000 without any problems.

However, if you need to touch any of the $36,000 in earnings before age 59 and 1/2 you will run into the same problems as other retirement accounts: an early withdrawal penalty of 10% of the withdrawal.

Your withdrawal is considered an unqualified distribution.

If you withdraw all $36,000 in earnings you would pay a penalty of $3,600, leaving you with $32,400.

Roth IRA 5 Year Rule

There is a rule in place that requires you to have had your Roth IRA open for at least five years before you can take a distribution of earnings without a penalty. If you opened a Roth at age 22 with $100 and didn’t contribute again until age 30, the Roth has been open for 8 years and you can take a distribution of earnings if you met one of the exceptions listed below.

Likewise if you opened your Roth IRA at age 53 and are now 56, you won’t be able to avoid the early withdrawal penalty even if you meet one of the exceptions because you haven’t met the five year rule requirement.

Exceptions to Roth IRA Early Withdrawal Penalty

Here are the exceptions that allow your early withdrawal to be a qualified distribution (and thus avoid the early withdrawal penalty):

You become disabled.

You die and the withdrawal is from your beneficiaries.

The withdrawal is…

part of a series of substantially equal periodic payments made over your life expectancy.

to pay for medical expenses that exceed 7.5% of your adjusted gross income.

used to pay for medical insurance premiums after you have received unemployment compensation for 12 weeks or longer.

to fund the purchase of your first home (up to $10,000).

used to pay for qualified higher education expenses for you or an eligible family member.

used to pay back taxes to the IRS.

Do Roth IRAs Have Required Minimum Distributions?

Most major retirement accounts require you to eventually begin taking money out of your account even if you don’t want or need to.

Why does the government care if you take money out of these accounts? Taxes.

When you fund a pre-tax retirement account like a 401k, you avoid paying income tax on the money today and pay it in the future when you withdraw the funds. If you never withdrew the funds you would never pay taxes on the money.

The IRS wants to get its hands on that money one way or another, so they force you to begin taking withdrawals. For most accounts this is at age 70 and 1/2; there is a specific IRS schedule that calculates how much money you have to take out every year.

The great thing about Roth IRAs is you are never forced to withdraw funds because you have already paid income tax on your contributions. This means you could pass the full Roth IRA on to your heirs without taking a dime out for retirement.

Finally

The Roth IRA is a powerful investment tool to add to your retirement toolbox. Because the Roth has its own special tax considerations (you contribute after you are taxed), it also has special withdrawal rules, which could be very beneficial to you.

Have you taken a withdrawal from a Roth IRA? What was the situation?

This article is part of the Roth IRA Movement taking place March 27th, created by Jeff Rose of Good Financial Cents to bring awareness to the Roth IRA and how it can help you with your retirement savings. Be sure to visit the many sites taking part in the movement. I bet you’ll learn a thing or two you didn’t already know about Roth IRAs!

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Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, ING Direct, and many others.

Great article and clarification. It really makes it easier to help others with this info. I recently started a Roth IRA for my younger brother, but was unable to answer questions like these to him. This will help explain it better to him so he can be confident with this decision.

I would try not use any nest egg in hard times if possible. Usually regret it and can usually find the money other ways, That is not to say that will always be the case, which is why I will be getting myself a Roth IRA after reading this, Thanks for the info.

Just a point of clarification with regard to the 5-year rule: Not meeting the rule doesn’t necessarily mean that a pre-59.5 distribution will be subject to the 10% penalty. What it does mean is that the distribution (if prior to 59.5) will be subject to ordinary income tax.

If one of the exceptions you listed is met, there will be no 10% penalty.

I opened my Roth IRA by rolling over my 401k after I left my previous job. Is this considered a “contribution” that I can withdraw at anytime without penalty or taxes?

Also, I took advantage of splitting my taxes on this over two years for my tax returns. Does this have any affect?

Lastly, on the exceptions for early withdrawal, am I understanding correctly that I can use my contributions for my first home (“qualified distribution”) even if my Roth IRA has not been open for 5 years?

I will be 59 1/2 at the end of 2013. I retired in 2004, and became disabled in 2005. Due to the new American Taxpayer Relief Act, I will be able to withdraw my 401K, and transfer it to a Roth IRA. Will I then be able to withdraw prior to the 5 year rule, (with no penalties) given that I am disabled? If so, how soon can I withdraw funds? Thank you for replying.

There would be no penalty, due to your being disabled. (Note that this would be true even if you did not convert it to a Roth. Distributions from a 401k that occur after after disability are not subject to the 10% penalty either.)

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